Microeconomics ECO 231 Chp 1-4
when one person's actions have an impact on a bystander
externality
True or False: An increase in the demand for notebooks raises the quantity of notebooks demanded but not the quantity supplied
false
t/f An auto manufacturer should continue to produce additional auto as long as the firm is profitable, even if the cost of the additional units exceeds the price received.
false; a manufacturer should produce as long as the marginal benefit exceeds the marginal cost
t/f In the short run, a reduction in inflation tends to cause a reduction in unemployment.
false; a reduction in inflation tends to raise unemployment
t/f An individual farmer is likely to have market power in the market of wheat.
false; a single farmer is too small to influence the markey
t/f The US will benefit economically if we eliminate trade with Asian countries b/c we will be forced to produce more of our own cars and clothes.
false; all countries gain from voluntary trade
t/f A tax on liquor raises the price of liquor and provides an incentive for consumers to drink more.
false; higher prices reduce the quantity demanded
t/f Workers in the US have a relatively high standard of living b/c the US has a relatively high minimum wage.
false; it is b/c they are productive
Workers in Australia can produce 20 units of FOOD and 5 units of ELECTRONICS per month. Workers in Korea can produce 8 units of FOOD and 4 units of ELECTRONICS per month. The opportunity cost of 1 unit of electronics in AUS is?
4 units of food
Which Principles of Economics describe how the economy as a whole works?
8. A country's standard of living depends on its ability to produce goods and services 9. Prices rise when the government prints too much money 10. Society faces a short-run trade-off between inflation and unemployment
t/f if a country's workers can produce 5 hamburgers per hour or 10 bags of french fries per hour, absent trade, the price of 1 bag of fries is 2 hamburgers
false; the price of 1 bag of fries is 1/2 of a hamburger
t/f the statement, "An increase in inflation tends to cause unemployment to fall in the short run: is normative.
false; the statement is positive
t/f it is reasonable to assume that the world is composed of only one person when modeling international trade
false; there must be at least two individuals for trade
the law of supply states that an increase in the price of a good
increases the quantity supplied of that good
a good for which, other things equal, an increase in income leads to a decrease in demand
inferior good
an increase in the price of beef provides
information that tells producers to produce more beef
if a nation has an absolute advantage in the production of a good,
it can produce that good using fewer resources than its trading partner
if a nation has a comparative advantage in the production of a good,
it can produce that goods at a lower opportunity cost than its trading partner
a good for which, other things equal, an increase in income leads to increase in demand
normal good
prescriptions for how the world ought to be
normative statements
T/f if an economy were experiencing substantial unemployment, the economy is producing insider the production possibilities frontier
true
t/f absolute advantage is comparison among producers based on productivity
true
t/f an advance in production technology would cause the production possibilities curve to shift outwars
true
t/f an advance in the technology employed to manufacture rollerblades will result in a decrease in the equilibrium price and an increase in the equilibrium quantity in the market for rollerblades
true
t/f assumptions make the world easier to understand b/c the simplify reality and focus our attention
true
t/f comparative advantage is the comparison among producers based on opportunity cost
true
t/f comparative advantage, not absolute advantage, determines the decision to specialize in production
true
t/f if Coca-Cola and Pepsi are substitutes, an increase in the price of Coca-Cola will cause an increase in the equilibrium price and quantity in the market for Pepsi
true
t/f if Germany's productivity doubles for everything it produces, this will not alter it prior pattern of specialization b/c it has not altered its comparative advantage
true
t/f if a producer is self-sufficient, the production possibilities frontier is also the consumption possibilities frontier
true
t/f if an economy if operating on its production possibilities frontier, it must produce less of one good if it produces more of another
true
t/f if consumers expect the price of shoes to rise, there will be an increase in the demand for shoes today
true
t/f if gains from trade are based solely on comparative advantage, and if all countries have the same opportunity cost of production, then there are no gains from trade
true
t/f if pencils and paper are complements, an increase in the price of pencils causes the demand for paper to decrease or shift to the left
true
t/f if producers have different opportunity costs of production, trade will allow them to consume outside their production possibilities frontiers
true
t/f most economists believe that tariffs and import quotas usually reduce general economic welfare
true
t/f the gains from trade can be measured by the increase in total production that comes from specialization
true
t/f the law of supply states that an increase in the price of a good increases the quantity supplied of that good
true
t/f the market supply curve is the horizontal summation of the individual supply curves
true
t/f when economists make positive statements, they are more likely to be acting as scientisits
true
t/f when people act as scientists, they must be objective
true
t/f if an economy is operating on its production possibilities frontier, it must be using resources efficiently
true
t/f if golf clubs and golf balls are complements, an increase in the price of golf clubs will decrease the demand for golf balls
true
What must be given up to obtain an item is called
opportunity cost
whatever is given up to get something else
opportunity cost
Your opportunity cost of going to a movie is
the total cash expenditure needed to go to the movie plus the value of your time
if the price of a good is below equilibrium price,
there is a shortage and price will rise
if the price of a good is above the equilibrium price,
there is a surplus and price will fall
When two individuals produce efficiently and then make a mutually beneficial trade based on comparative advantage,
they both obtain consumption outside their production possibilities frontier.
Which goods will a nation typically import?
those goods in which other nations have a comparative advantage
Objective development and testing of theories
scientific method
the principle that self- interested market participants may unknowingly maximize the welfare of society as a whole
"invisible hand"
Workers in Australia can produce 20 units of FOOD and 5 units of ELECTRONICS per month. Workers in Korea can produce 8 units of FOOD and 4 units of ELECTRONICS per month. The opportunity cost of 1 unit of food in Korea is?
1/2 of a unit of electronics
Workers in Australia can produce 20 units of FOOD and 5 units of ELECTRONICS per month. Workers in Korea can produce 8 units of FOOD and 4 units of ELECTRONICS per month. The opportunity cost of 1 unit of food in AUS is?
1/4 of a unit of electronics
Which Principles of Economics describes how people make decisions?
1. People face trade-offs 2. The cost of something is what you give up to get it 3. Rational people think at the margin 4. People respond to incentives
Ten Principles of Economics
1. People face trade-offs 2. The cost of something is what you give up to get it 3. Rational people think at the margin 4. People respond to incentives 5. Trade can make everyone better off 6. Markets are usually a good way to organize economic activities 7. Governments can sometimes improve market outcomes 8. A country's standard of living depends on its ability to produce goods and services 9. Prices rise when the government prints too much money 10. Society faces a short-run trade-off between inflation and unemployment
you have spent $1000 building a hot-dog stand based on estimates of sales of $2000. The hot-dog stand is nearly completed, but now you estimate total sales to be only $800. You can complete the hot-dog stand for another $300. 1. Should you complete the hot-dog stand? (assume that the hot dogs cost you nothing) 2. Your decision rule should be to complete the hot-dog stand as long as the cost to complete the stand is less than?
1. yes 2. $800
Workers in Australia can produce 20 units of FOOD and 5 units of ELECTRONICS per month. Workers in Korea can produce 8 units of FOOD and 4 units of ELECTRONICS per month. The opportunity cost of 1 unit of electronics in Korea is?
2 units of food
Which Principles of Economics describes how people interact?
5. Trade can make everyone better off 6. Markets are usually a good way to organize economic activities 7. Governments can sometimes improve market outcomes
Workers in Australia can produce 20 units of FOOD and 5 units of ELECTRONICS per month. Workers in Korea can produce 8 units of FOOD and 4 units of ELECTRONICS per month. Who has the comparative advantage in food and who has the comparative advantage in electronics?
AUS - food Korea - electronics
two goods for which, other things equal, an increase in income leads to an increase in demand
complements
A furniture maker currently produces 100 tables per week and sells them for a profit. She is considering expanding her operation in order to make more tables. Should she expand?
It depends on the marginal cost of producing more tables and the marginal revenue she will earn from selling more tables
A change in which of the following will not shift the demand curve for hamburgers?
The price of hamburgers
inputs such as land, labor, and capital
factor of production
Economic growth is depicted by
a shift in the production possibilities frontier outward
All of the following shift the supply of watches to the right except a. an increase in the price of watches b. an advance in the technology used to manufacture watches c. a decrease in the wage of workers employed to manufacture watches d. manufacturers' expectations of lower watch prices in the future e. all of the above cause an increase in the supply of watches
a. an increase in the price of watches
Which of the following statements is true about a market economy? a. market participants act as if guided by an "invisible hand" to produce outcomes that promote general economic well-being b. taxes help prices communicate costs and benefits to producers and consumers c. with a large enough computer, central planners could guide production more efficiently than markets d. the strength of a market system is that it tends to distribute resources evenly across consumers
a. market participants act as if guided by an "invisible hand" to produce outcomes that promote general economic well-being
Which of the following statements regarding the circular-flow diagram is true? a. the factors or production are owned by households b. If Susan works for IBM and receives a paycheck, the transaction takes place in the market for goods and services c. If IBM sells a computer, the transaction takes place in the market of factors of production d. the factors of production are owned by firms e. none of the above
a. the factors or production are owned by households
Suppose consumer tastes shift toward the consumption of apple. Which of the following statements is an accurate description of the impact of this event on the market of apples? a. there is an increase in the demand for apples and an increase in the quantity supplied of apples b. there is an increase in the demand and supply of apples c. there is an increase in the quantity demanded of apples and in the supply for apples d. there is an increase in the demand for apples and a decrease in the supply if apples e. there is a decrease in the quantity demanded of apples and an increase in the supply for apples
a. there is an increase in the demand for apples and an increase in the quantity supplied of apples
the ability to produce a good using fewer inputs than another producer
absolute advantage
a decrease (leftward shift) in the supply for a good will tend to cause
an increase in the equilibrium price and a decrease in the equilibrium quantity
an increase (rightward shift) in the demand for a good will tend to cause
an increase in the equilibrium price and quantity
if an increase in consumer incomes leads to a decrease in the demand for camping equipment, the camping equipment is
an inferior good
which of the following activities is most likely to produce an externatlity? a. a student sits at home and watches TV b. a student has a party in her dorm room c. a student reads a novel for pleasure d. a student eats a hamburger in the student union
b. a student has a party in her dorm room
A microeconomist — as opposed to a macroeconomist — might study a. the effect of borrowing by the federal government on the inflation rate. b. the effect of rising oil prices on employment in the airline industry. c. changes in the nation's unemployment rate over short periods of time. d. alternative policies to promote higher living standards throughout the nation.
b. the effect of rising oil prices on employment in the airline industry.
Which of the following is not part of the opportunity cost of going on vacation? a. the money you could have made if you had stayed home and worked b. the money you spent on food c. the money you spent on airline tickets d. the money you spent on a Broadway show
b. the money you spent on food
economic models are
built with assumptions
fluctuations in economic activity
business cycle
Workers in Australia can produce 20 units of FOOD and 5 units of ELECTRONICS per month. Workers in Korea can produce 8 units of FOOD and 4 units of ELECTRONICS per month. Which of the following statements about absolute advantage is true? a. Aus had an absolute advantage in the production of food while Korea has an absolute advantage in the production of electronics. b. Korea has an absolute advantage in the production of food while AUS has an absolute advantage in the production of electronics c. AUS has an absolute advantage in the production of both food and electronics d. Korea has an absolute advantage in the producation of both food and electronics
c. AUS has an absolute advantage in the production of both food and electronics
the case in which there is only one seller in the market
monopoly
Joe is a tax accountant. He receives $100 per hour doing tax returns. He can type 10000 characters per hour into spreadsheets. He can hire an assistant who types 2500 characters per hour into spreadsheets. Which of the following statements is true? a. Joe should not hire an assistant b/c the assistant cannot type as fast as he can b. Joe should hire the assistant as long as he pays the assistant less than $100 per hour c. Joe should hire the assistant as long as he pays the assistant less than $25 per hour d. none of the above
c. Joe should hire the assistant as long as he pays the assistant less than $25 per hour
Which of the following situation describes the greatest market power? a. a farmer's impact on the price of corn b. Volvo's impact on the price of autos c. Microsoft's impact on the price of desktop operating systems d. a student's impact on college tuition
c. Microsoft's impact on the price of desktop operating systems
Which of the following shifts the demand for watches to the right? a. a decrease in the price of watches b. a decrease in consumer incomes if watches are a normal good c. a decrease in the price of watch batteries and watches are complements d. an increase in the prices of watcher e. none of the above
c. a decrease in the price of watch batteries and watches are complements
Which of the following will not shift a country's production possibilities frontier outward? a. an increase in the capital stock b. an advance in technology c. a reduction in unemployment d. an increase in the labor force
c. a reduction in unemployment
a diagram of the economy that shows the flow of goods and services, factors or producation, and monetary payments between households and firms
circular-flow diagram
The equilibrium price ______ the market of excess supply or excess demand.
clears
the ability to produce a good at a lower opportunity cost than another producer
comparative advantage
a market in which there are many buyers and sellers so that each has a negligible impact on the market price
competitive market
according to the principle of comparative advantage,
countries should specialize in the production of goods for which they have a lower opportunity cost of production than their trading partners
which of the following is not a factor of production? a. land b. labor. c. capital d. money e. all of the above are factors of production
d. money
which of the following statements is true about the impact of an increase in the price of lettuce a. the demand for lettuce will decrease b. the supply of lettuce will decrease c. the equilibrium price and quantity of salad dressing will rise d. the equilibrium price and quantity of salad dressing will fall e. both a and d are true
d. the equilibrium price and quantity of salad dressing will fall
Which of the following statements about trade is true? a. unrestricted international trade benefits every person in a country equally b. people that are skilled at all activities cannot benefit from trade c. trade can benefit everyone in society b/c it allows people to specialize in activities in which they have an absolute advantage d. trade can benefit everyone in society b/c it allows people to specialize in activities in which they have a comparative advantage
d. trade can benefit everyone in society b/c it allows people to specialize in activities in which they have a comparative advantage
an inferior good is one for which an increase in income causes a(n)
decrease in demand
the law of demand states that an increase in the price of a good
decreases the quantity demanded for that good
a graph of the relationship between the price of a good and the quantity demanded
demand curve
True or False: When the demand curve and the supply curve shift in the direction previously indicated, the effect on the equilibrium price is clear even without knowing the magnitude of the shifts.
false
a table that shows the relationship between the price of a good and the quantity demanded
demand schedule
Which of the following involve a trade-off? a. buying a new car b. going to college c. watching a football game on a Saturday afternoon d. taking a nap e. all of the above
e. all of the above
which of the following products would be least capable of producing an externality? a. cigarettes b. stereo equipment c. inoculations against disease d. education e. food
e. food
simplifications of reality based on assumptions
economic models
study of how society manages its scarce resources
economics
the property of society getting the most from its scarce resources
efficiency
the property of distributing economic prosperity uniformly among society's member
equality
The terms equality and efficiency are similar in that they both refer to benefits to society. However they are different in that
equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits from scarce resources
a situation in which the price has reached the level where quantity supplied equals quantity demanded
equilibrium
market clearing price is also called
equilibrium price
the price that balances quantity supplied and quantity demanded
equilibrium price
the quantity supplied and the quantity demanded at the equilibrium price
equilibrium quantity
suppose there is an increase in both the supple and demand for personal computers, in the market for personal computers we would expect the
equilibrium quantity to rise and the change in equilibrium price to be ambiguous
suppose there is an increase in both the supple and demand for personal computers, furthermore, suppose the supply of personal computers increase more than the demand, in the market for personal computers we would expect the
equilibrium quantity to rise and the equilibrium price to fall
goods produced domestically and sold abroad
exports
t/f talented people that are best at everything have a comparative advantage in the production of everything
false; a low opportunity cost of producing one good implies a high opportunity cost of producing the other good
t/f a perfectly competitive market consists of products that are all slightly different from one another
false; a perfectly competitive market consists of goods offered for sale that are all exactly the same
T/F If Japan has a absolute advantage in the production of an item, it must also have a comparative advantage in the production of the at item
false; absolute advantage compares the quantities of inputs used in production while comparative advantages compares the opportunity costs
t/f if there is a shortage of a good, then the price of that good tends to fall
false; an excess demand causes the price to rise
t/f an increase in the price of steel will shift the supply of automobiles to the right
false; an increase in the price of an input shifts the supply curve for the output to the left
t/f economic models must mirror reality or they are of no value
false; economic models are simplifications of reality
t/f when the price of a good is below equilibrium price, it causes a surplus
false; it causes an excess demand
t/f the production possibilities frontier is bowed outward b/c the trade-off between the production of any two goods is constant
false; it is bowed outward b/c trade-offs are not constant
t/f when a country removes a specific import restriction, it always benefits every worker in that country
false; it may harm those involved in that industry
t/f if apples and oranges are substitutes, an increase in the price of apples will decrease the demand for oranges
false; it will increase the demand for oranges
t/f normative statements can be refutes with evidence
false; normative statements cannot be refuted
t/f points outside the production possibilities frontier are attainable but inefficient
false; points outside the productions possibilities frontier cannot yet be attained
t/f self-sufficiency is the best way to increase one's material welfare
false; restricting trade eliminates gains from trade
t/f Macroeconomics is concerned with the study of how households and firms make decisions and how they interact in specific markerts
false; that is microeconomics
t/f the law of demand states that an increase in the price of a good decreases the demand for that good
false; the law of demand states that an increase in the price of a good decreases the quantity demanded of that good (a movement along the demand curve)
t/f if there is an increase in supply accompanied by a decrease in demand for coffee, then there will be a decrease in both the equilibrium price and quantity in the market for coffee
false; there will be a decrease in the equilibrium price, but the impact on the equilibrium quantity is ambiguous
t/f if an advanced country has an absolute advantage in the production of everything, it will benefit if it eliminated trade with less-developed countries and becomes completely self-sufficient
false; voluntary trade benefits all trade
t/f if trade benefits one country, its trading partner must be worse off due to trade
false; voluntary trade benefits both traders
the increase in total production due to specialization allowed by trade
gains from trade
high and persistent inflation is caused by
governments increasing the quantity of money too much
goods produced abroad and sold domestically
imports
productivity can be increases by
improving the education of workers
something that induces a person to act
incentive
the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
law of demand
the claim that, other things equal, the quantity supplied and quantity demanded for the good into balance
law of supply
the claim that the price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance
law of supply and demand
the study of economy-wide phenomena
macroeconomics
a perfectly competitive market has
many buyers and sellers
an incremental adjustment to an existing plan
marginal change
a group of buyers and sellers of a particular good or service
market
an economic system where interactions of households and firms in markets determines the allocation of resources
market economy
a situation in which the market fails to allocate resources efficiently
market failure
the ability of an individual or group to substantially influence market prices
market power
the study of how households and firms make decisions and how they interact in markets
microeconomics
descriptions of the world as it is
positive statements
Suppose a frost destroys much of the Florida orange crop. At the same time, suppose consumers tastes shifts toward OJ. What would we expect to happen to the equilibrium price and quantity in the market for OJ?
price will increase; quantity is ambiguous
Suppose both buyers and sellers of wheat expect the price of wheat to rise in the near future. What would we expect to happen to the equilibrium price and quantity in the market for wheat toady?
price will increase; quantity is ambiguous
a graph that shows the combinations of output the economy can possibly produce given the available factors of production and the available production technology
production possibilities frontier
the amount of a good that buyers are willing and able to purchase
quantity demanded
the amount of a good that sellers are willing and able to sell
quantity supplied
a situation in which quantity demanded is greater than quantity supplied
shortage
Workers in Australia can produce 20 units of FOOD and 5 units of ELECTRONICS per month. Workers in Korea can produce 8 units of FOOD and 4 units of ELECTRONICS per month. Korea should
specialize in electronic production, export electronics, and import food
if an increase in the price of blue jeans leads to an increase in the demand for tennis shoes, then blue jeans and tennis shoes are
substitutes
two goods for which an increase in the price of one leads to an increase in the demand for the other
substitutes
a graph of the relationship between the price of a good and the quantity supplied
supply curve
a table that shows the relationship between the price of a good and the quantity supplied
supply schedule
a situation in which quantity supplied is greater than quantity demanded
surplus
suppose a country's workers can produce 4 watches per hours or 12 rings per hour. If there is no trade,
the domestic price of 1 ring is 1/3 of a watch; the opportunity cost of 1 watch is 3 rings
What will happen to the equilibrium price of new textbooks if more students attend college, paper becomes cheaper, textbook authors accept lower royalties, and fewer used textbooks are sold?
the price change will be ambiguous
Workers in Australia can produce 20 units of FOOD and 5 units of ELECTRONICS per month. Workers in Korea can produce 8 units of FOOD and 4 units of ELECTRONICS per month. Prices of electronics can be stated in terms of units of food. What is the range of prices of electronics for which both countries could gain from trade?
the price must be greater than 2 units of food but less than 4 units of food
if the price of a good is equal to the equilibrium price,
the quantity demanded is equal to the quantity supplied and the price remains unchanged
A production possibilities frontier is a straight line when
the rate of trade-off between the two goods being produces is constant
suppose you find $20. If you choose to the $20 to go to a football game, your opportunity cost of going to the game is
$20 (could have been used to buy other things) plus the value of your time spent at the game
Assume for the United States that the opportunity cost of each airplane is 100 cars. Then which of these pairs of points could be on the United States' production possibilities frontier?
(300 airplanes, 15000 cars) and (200 airplanes, 25000 cars)
If the price for 100 units is $10, if the law of demand applies to this good, what is the quantity demanded at $20?
0 units
Boston workers can produce 3 Red Socks per hour and 3 White Socks per hour. Chicago workers can produce 2 Red Socks per hour and 1 White Sock per hour. Without trade, the price of a pair of white socks (in terms of red socks) in Boston is 1._____ of red socks, and in Chicago it is 2._____ of red socks. 3.____ has an absolute advantage in the production of red socks, and 4.____ has an absolute advantage in the production of white socks. 5.____ has a comparative advantage in the production of red socks, and 6.____ has a comparative advantage in the production of white socks. If the cities trade with each other, Chicago will export 7.____ socks, and Boston will export 8.____ socks. The price of white socks can be expressed in terms of red socks. The highest price at which white socks can be traded that would make both cities better off is 9.____ of red socks per pair of white socks, and the lowest price that makes both cities better off is 10____ of red socks per pair of white socks.
1. 1 pair 2. 2 pairs 3. Boston 4. Boston 5. Chicago 6. Boston 7. red 8. white 9. 2 pairs 10. 1 pair
Suppose that in a year an American worker can produce 100 shirts or 20 computers and a Chinese worker can produce 100 shirts or 10 computers. Suppose that without trade the workers in each country spend half their time producing each good. If these countries were open to trade, 1.____ would export shirts and 2.____ would benefit from trade. The price of a computer can be expressed in terms of shirts. The highest price for which a computer can be traded that would make both countries better off is 3.___ shirts per computer, and the lowest price that makes both countries better off is 4.___ shirts per computer. Suppose that China catches up with American productivity so that a Chinese worker can produce 100 shirts or 20 computers. True or False: There are no longer gains from trade.
1. China 2. both countries 3. 10 4. 5 5. true
England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour. 1. (English/Scottish) workers have an absolute advantage in producing scones, and 2. (English/Scottish) workers have an absolute advantage in producing sweaters. 3. (English/Scottish) workers have a comparative advantage in producing scones, and 4. (English/Scottish) workers have a comparative advantage in producing sweaters. If England and Scotland decide to trade, Scotland will trade 5. (sweaters/scones) to England. If a Scottish worker could produce only 1 sweater per hour, Scotland 6. (would still/ would no longer) gain from trade, and England 7. (would still/would no longer) gain from trade.
1. English 2. Scottish 3. English 4. Scottish 5. sweaters 6. would still 7. would still
Which of the following is a positive, rather than a normative, statement? 1. Law X will reduce national income. 2. Law X is a good piece of legislation. 3. Congress ought to pass law X. 4. The President should veto law X.
1. Law X will reduce national income.
Over the past 30 years, technological advances have reduced the cost of computer chips. This has led to 1.____ in the supply of computers, causing the price of computers to 2.____. Because computers and computer software are 3.____ , this change in price causes the demand for computer software to 4____ . However, computers and typewriters are 5.____, so the change in the price of computers 6.____ the demand for typewriters.
1. an increase 2. fall 3. complements 4. increase 5. substitutes 6. decreases
Ketchup is a complement (as well as a condiment) for hot dogs. If the price of hot dogs rises, the quantity of hot dogs demanded 1.____ , which 2.____ the demand for ketchup. Because of the change in the equilibrium quantity of ketchup, the demand for tomatoes by ketchup producers 3.____ , causing the equilibrium price of tomatoes to 4.____. This means producers of tomato juice face 5.____ input prices, and the supply of tomato juice 6.____ . The resulting 7.____ in the price of tomato juice causes people to substitute 8.____ , so the demand for orange juice 9____ .
1. falls 2. lowers 3. falls 4. decrease 5. lower 6. increases 7. fall 8. away from OJ and towards tomato juice 9. falls
If the actual price in this market were above the equilibrium price, quantity supplied would be 1. ____ than quantity demanded, so there would be 2. _____ pressure on prices.
1. greater 2. downward
Suppose that a worker in Boatland can produce either 5 units of wheat or 25 units of fish per year, and a worker in Farmland can produce either 25 units of wheat or 5 units of fish per year. There are 10 workers in each country. Political pressure from the fish lobby in Farmland and from the wheat lobby in Boatland has prevented trade between the two countries on the grounds that cheap imports would kill the fish industry in Farmland and the wheat industry in Boatland. As a result, Boatland produces and consumes 25 units of wheat and 125 units of fish per year while Farmland produces and consumes 125 units of wheat and 25 units of fish per year. If the political pressure were overcome and trade were to occur, each country would completely specialize in the product in which it has a comparative advantage. If trade were to occur, the combined output of the two countries would increase by
100 units of wheat and 100 units of fish
All of the following topics fall within the study of microeconomics EXCEPT: 1. the impact of cigarette taxes on the smoking behavior of teenagers. 2. the role of Microsoft's market power in the pricing of software. 3. the effectiveness of antipoverty programs in reducing homelessness. 4. the influence of the government budget deficit on economic growth.
4. the influence of the government budget deficit on economic growth.
Which of the following might lead to an increase in the equilibrium price of jelly and a decrease in the equilibrium quantity of jelly sold?
An increase in the price of grapes, an input to jelly
Suppose that in the United States, producing an aircraft takes 10,000 hours of labor and producing a shirt takes 2 hours of labor. In China, producing an aircraft takes 40,000 hours of labor, while producing a shirt takes 4 hours of labor. What will these nations trade?
China will export shirts, while the United States will export aircraft.
Suppose the world consists of two countries - the United States and Mexico. Further, suppose there are only two goods - food and clothing. Which of the following statements is true?
If the US has a comparative advantage in the production of food, the Mexico must have a comparative advantage in the production of clothing.
A bagel shop sells fresh baked bagels from 5 a.m. until 7 p.m. every day. The shop does not sell day-old bagels, so all unsold bagels are thrown away at 7 p.m. each day. The cost of making and selling a dozen bagels is $1.00; there are no costs associated with throwing bagels away. If the manager has 8 dozen bagels left at 6:30 p.m. on a particular day, which of the following alternatives is most attractive?
Lower the price of the remaining bagels, even if the price falls below $1.00 per dozen.
One way to characterize the difference between positive statements and normative statements is as follows
Positive statements offer descriptions of the way things are, whereas normative statements offer opinions on how things ought to be.
If the economy goes into a recession and incomes fall, what happens in the markets for inferior goods?
Prices and quantities both rise.
In an hour, David can wash 2 cars or mow 1 lawn, while Ron can wash 3 cars or mow 1 lawn. Who has the comparative advantage in car washing, and who has the comparative advantage in lawn mowing?
Ron in washing, David in mowing.
In an hour, David can wash 2 cars or mow 1 lawn, while Ron can wash 3 cars or mow 1 lawn. Who has the absolute advantage in car washing, and who has the absolute advantage in lawn mowing?
Ron in washing, neither in mowing.
The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $3 million. If it would cost $1 million to finish development and make the product, you (Should/Should Not) go ahead and do so. The most you should pay to complete development is ___ million dollars.
Should; 3
You win $100 in a basketball pool. You have a choice between spending the money now or putting it away for a year in a bank account that pays 5% interest. Which of the following is included in the opportunity cost of spending $100 now?
The $105 you would have a year from now if you put it in the bank
When Selena pays the storekeeper and Shanna pays her hairdresser, they are interacting with sellers in markets for goods and services. Therefore, goods and services flow from firm to household, and dollars flow from household to firm in these examples. When Stuart earns income from working and Salma earns money from owning Acme Industrial, they are interacting with buyers in the markets for factors of production. Therefore, goods and services flow from household to firm, and dollars flow from firm to household. See Section: Our First Model: The Circular-Flow Diagram.
The circular-flow diagram simplifies the economy by including only two types of decision makers: firms and households. Firms produce goods and services using inputs such as labor, land, and capital. These inputs are called the factors of production. Households own the factors of production and consume all the goods and services that the firms produce. In the markets for the factors of production, households are sellers, and firms are buyers; so goods flow from households to firms, and dollars flow from firms to households. In the markets for goods and services, households are buyers, and firms are sellers; so goods flow from firms to households, and dollars flow from households to firms.
Movie tickets and DVDs are substitutes. If the price of DVDs increases, what happens in the market for movie tickets?
The demand curve shifts to the right.
The production possibilities frontier is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, the production possibilities frontier has a bowed shape because the opportunity cost of butter in terms of the number of guns is not constant. When the economy is using most of its resources to make guns, such as at point B, the resources best suited to butter production, such as farmers and cows, are being used in the weapons industry. Because these resources probably aren't very good for making guns, increasing butter production by one unit will cause only a slight reduction in the number of guns produced. At point B, the opportunity cost of butter in terms of guns is small, and the frontier is relatively flat. By contrast, when the economy is using most of its resources to make butter, such as at point C, the resources best suited to making butter are already at work in the butter industry. Producing additional butter means moving some of the best gun makers out of the weapons industry and turning them into farmers. As a result, producing additional butter will mean a substantial loss of gun output. The opportunity cost of butter is high, and the frontier is steep. See Section: Our Second Model: The Production Possibilities Frontier.
The production possibilities frontier is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. Because resources are scarce, not every conceivable outcome is feasible. With the resources it has, the economy can produce at any point on or inside the production possibilities frontier, but it cannot produce at points outside the frontier. Therefore, points A, B, and C are feasible, but point D is impossible for the economy to achieve. An outcome is said to be efficient if the economy is getting all it can from the scarce resources it has available. Points on (rather than inside) the production possibilities frontier represent efficient levels of production. In this case, point A is feasible but inefficient, since it lies inside the production possibilities frontier. See Section: Our Second Model: The Production Possibilities Frontier.
You were planning to spend Saturday working at your part-time job, but a friend asks you to go skiing. Now suppose you had been planning to spend the day studying at the library. What is the cost of going skiing in this case?
The rental of any ski equipment you need, The cost of a lift ticket, The value of your time spent studying
You were planning to spend Saturday working at your part-time job, but a friend asks you to go skiing. Which of the following are included in the true cost of going skiing?
The rental of any ski equipment you need, The cost of a lift ticket, The wages you forgo by going skiing
Mark can cook dinner in 30 minutes and wash the laundry in 20 minutes. His roommate takes half as long to do each task. How should the roommates allocate the work?
There are no gains from trade in this situation.
Within the Production Possibilities Frontier Model, economic growth is depicted by ______?
a shift in the production possibilities frontier outward
An economic model is
a simplified representation of some aspect of the economy.
foreign trade
allows a country to hava a grader variety of products at a lower cost than if it tried to produce everything at home
The phenomenon of scarcity stems from the fact that
resources are limited
Which of the following is an example of a normative, as opposed to positive, statement? a. Gasoline prices ought to be lower than they are now. b. The federal government should raise taxes on wealthy people. c. The social security system is a good system and it deserves to be preserved as it is. d. All of the above are normative statements.
d. All of the above are normative statements.
t/f Adam Smith's "invisible hand" concept describes how corporate business reaches into the pockets of consumers like an "invisible hand."
false; it refers to how markets guide self-interested people to create desirable social outcomes
T/F When the government redistributes income with taxes and welfare, the economy becomes more efficient.
false; the economy becomes led efficient b/c it decreases the incentive to work hard
A point inside the production possibilities frontier is
feasible, but not efficient.
The circular-flow diagram illustrates that, in markets for the factors of production,
households are sellers, and firms are buyers.
Economics is best defined as the study of
how society manages its scarce resources
raising taxes and increasing welfare payments
improves equality at the expense of efficiency
A marginal change is one that
incrementally alters an existing plan.
an increase in the overall level of prices
inflation
The circular-flow diagram
is an economic model, incorporates two types of decision makers: households and firms, and represents the flows of inputs, outputs, and dollars.
An economy produces hot dogs and hamburgers. If a discovery of the remarkable health benefits of hot dogs were to change consumers' preferences, it would
move the economy along the production possibilities frontier.
Suppose the state of Iowa passes a law that increases the price of cigarettes by $1 per pack. As a result, residents in Iowa start purchasing their cigarettes in surrounding states. Which of the following principles does this best illustrate?
people respond to incentives
Pens are normal goods. What will happen to the equilibrium price of pens if the price of pencils rises, consumers experience an increase in income, writing in ink becomes fashionable, people expect the price of pens to rise in the near future, the population increases, fewer firms manufacture pens, and the wages of pen-makers increase?
price will rise
New oak tables are normal goods. What would happen to the equilibrium price and quantity in the market for oak tables if the price of maple tables rises, the price of oak wood rises, more buyers enter the market for oak tables, and the price of wood saws increased?
price will rise and the effect on quantity is ambiguous
the amount of goods and services produced from each unit of labor input
productivity
the ability of an individual to own and exercise control over scarce resources
property rights
Governments may intervene in a market economy in order to
protect property rights, correct a market failure due to externalities, achieve a more equal distribution of income.
systematically and purposefully doing the best you can to achieve your objectives
rational
trade-offs are required b/c wants are unlimited and resources are
scarce
limited resources and unlimited wants
scarcity
B/c people respond to incentives, we would expect that if the average salary of accountants increases by 50% while the average salary of teachers increases by 20%,
students will shift majors from education to accounting
The discovery of a large new reserve of crude oil will shift the ________ curve for gasoline, leading to a ________ equilibrium price.
supply; lower
An increase in ________ will cause a movement along a given demand curve, which is called a change in ________.
supply; quantity demanded
Adam Smith's phrase "invisible hand" refers to
the ability of free markets to reach desirable outcomes, despite the self-interest of market participants.
a rational person does not act unless
the action produced marginal benefits that exceed the marginal costs
True or False: If the actual price in this market were below the equilibrium price, suppliers could raise the price without losing sales.
true
t/f An unintended consequence of public support for higher education is that low tuition provides an incentive for many people to attend state universities even if they have no desire to learn anything.
true
t/f High and persistent inflation is caused by excessive growth in the quantity of money in the economy.
true
t/f Rational people act only when the marginal benefit of the action exceeds the marginal cost.
true
t/f Sue is better at cleaning, and Bob is better at cooking. It will take fewer hours to eat and clean if Bob specializes in cooking and Sue specializes in cleaning than if they share the jobs evenly.
true
t/f To a student, the opportunity cost of going to a basketball game would include the price of the ticket and the value of the time that could have been spent studying.
true
t/f When economists say, "There ain't no such thing as a free lunch," they mean that all economic decisions involve trade-offs.
true
t/f When jet flies overhead, the noise it generates if an externality.
true
Trade-offs are required because resources are limited and wants are _____________?
unlimited
